Notes COPY Flashcards
1
Q
How do banks make money?
A
Buy low-rate short-term deposits
Sell high-rate, long-term loans
2
Q
Don’t want a flat yield curve =>
A
indicator of a recession
3
Q
When Fed Fund rate is above 10-year Treasury =
A
Inverted Yield Curve
- indicator of a recession
4
Q
Do inverted yield curves cuase recessions?
A
Anoswer: no
5
Q
High short-term real interest rates =>
A
recessions
6
Q
Money =>
A
decreased transaction costs => increased specialization => increased productivity => increased ∆Y/Y
7
Q
Money is the storage of ______________
A
human energy
8
Q
4 functions of money
A
- Medium of exchange - trade money for g/s
- Unit of Account - unit of measurement / measure value in terms of dollars
- Store of Value - Use todays income for tomorrow’s consumption
- Standard of deferred payment - money is legal tender in the repayment of debt
9
Q
Full capacity =
A
82-84%
10
Q
Capacity utilzation =
A
present production
potential production
11
Q
Industrial production (output) fell________________
A
0.4% in October
up 1.7% y/y
12
Q
Factory activity fell because of ____________________
A
Hurricane Sandy disruptions
-1.0 percentage points
13
Q
Capital equipment spending and auto production should __________________
A
buoy activity into 2013
14
Q
Manufacturing otput fell _______
A
0.9%
15
Q
Weakness in manufacturing was __________________
A
uniform across many sectors
16
Q
Output is contracting at a _____________ annual rate, due to ___________
A
3.3%
fiscal cliff worries
17
Q
Utility output fell _______
A
0.1%
power outages from hurricanes
18
Q
Mining output rose ________
A
1.5%
greater extraction of crude oil
19
Q
Capacity utilization ratios are at ____________________
A
the lowest for the year
20
Q
Real money balances =
A
X = M / Price level
M = amount of money
21
Q
MD IS A FUNCTION OF
A
interest rate; YP
22
Q
Liquidity Preference Theory
A
Decrease in interest rate => increase in Quantity demanded of money
23
Q
If change in M/M = change in Y/Y then
A
Change in P/P = 0
24
Q
Irving’ Fisher’s Assumption
A
If change in Velocity of money = 0
Then Inflation = change in money supply - change in output
25
Inflation annual: october data
1.2%
26
Inflation numbers:
0.1% m/m, 2.2% y/y
Falling energy prices countered surging good prices
27
Core inflation numbers
0. 2% m/m, 2.0% y/y
2. 4% annual
Big gain in shelter index (rents)
Right at federal reserve's target
28
Expect lower inflation in 2013 due to a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
lack of broad pricing power and the subdued economic recovery
29
Lower future inflation will boost \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
real disposable income growth rates
30
The recent deceleration in inflation was a factor pushing the Federal Reserve to \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
implement another round of quantitative easing "QE-3" (print money to buy assets
31
Consumer confidence focuses on what?
labor market
32
Consumer confidence numbers
Rose from 73.1 to 73.7
33
Consumer Sentiment focuses on what?
numbers?
financial & personal income expectations
rose from 82.6 to 82.7
34
Rising confidence should \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
boost consumer spending
35
Optimism factors in consumer confidence
Labor market improvement
Falling debt burdens
Improving credit availability
Rising Stock Market
Falling gas prices
Improving housing market
36
Pessismism factors in consumer confidence
Fiscal cliff worries
High unemployment
Slow wage growth
Volatile stock prices
Fears of future tax increases
37
As economy grows and job growth strengthens expect \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
confidence to rise in 2013
38
Short Run Phillips Curve shows a negative relationship between \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
inflation and unemployment
\*shows inverse relationship
39
Structural relationship
Basic behavioral relationship that remains unchanged over long periods
40
Short-run Phillips curve is not \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
a structural economic relationship
41
Short-run phillips curve is not a permanent \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
long-run tradeoff
42
Short-run phillips curve is not a reliable menu of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
inflation and Unemployment rate combinations in the long run
43
Long run phillips curve duration
over 5 years
44
short run phillips curve duration
6-9 months
45
Negative slope of phillips curve is due to \_\_\_\_\_\_\_\_\_\_
workers and firms inflation forecasting errors
\*slope exists only if the change in inflation is unexpected (not predicted)
46
Inflation - expected inflation =
error
47
What happens if Inflation \> expected inflation
Real wages fall
Firms higher more workers than planned
Decrease in Unemployment Rate
48
When inflation is higher than expected =\>
Unemployment rate down
49
real wage \< expected real wage
real wages fall
50
What happens if change in inflation \< expected change in inflation
Real wage rises
Firms hire fewer workers than planned (or layoff people)
Increase Unemployment rate
51
Need more inflation to \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
lower unemployment rate
52
w/P \> w/P expected
real wage rises
53
Empire State Manufacturing Survey Index
Percentage of respondents indicating an increase minus percentage indicating a decrease
If index \> 0, then expansion
If index \< 0, then contraction
54
Empire State Manufacturing Survey
Current Index =
-5.0
55
Empire State Manufacturing Survey
Forecast index =
13
56
6-month outlook is not encouraging for \_\_\_\_\_\_\_\_\_\_\_\_\_\_
hiring and capital expnditures
57
Empire State Manufacturing Survey
Unfilled orders index =
-11.0
58
Empire State Manufacturing Survey
New orders index =
3.0
59
Empire State Manufacturing Survey
Shipments index =
15
optimistic leading indicator of future output
60
Empire State Manufacturing Survey
Inventories index =
-12
good sign
61
Prices paid index (beginning of the supply chain) is \_\_\_\_\_
rising
62
Prices received index is in \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
expansionary territory (gaining pricing power)
63
In the long run, an increase in inflation will \_\_\_\_\_\_\_\_\_\_\_\_
lead to an increase in wage growth, maintaining real wages
64
In the short run, an increase in inflation will \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
be greater than wage growth, leading to lower real wages without workers quitting
65
NAIRU correlation
U.R. natural = NAIRU = U.R. at which ∆P/P has no tendency to rise or fall
66
SRPC degree of slope is determined by:
1. If workers and firms have adaptive or rational expectations
2. The adjustment speed of wages and prices
67
Adaptie expectations
Workers and firms look at last few years and assume inflation will be the same
68
If adaptive expectations and slow wage adjustments, the slope is \_\_\_\_\_\_\_\_\_\_\_\_
flat (price stickiness)
69
The Fed wants \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
flat curve to decrease U.R. with little growth in inflation
70
If inflation growth is moderate and stable and slow wage adjustments, then expectations are \_\_\_\_\_\_\_\_
adaptive
71
If rational expectations and fast wage adjustments, then slope is \_\_\_\_\_\_\_\_\_\_\_\_\_
vertical
An expansionary monetary policy would be ineffective
72
Causes of 2008-1010 Disinflation
1. Output gap
2. Lower expected growth in inflation = 1% =\> shift down SRPC
73
Quantitative Easing 2
FED creating money to purchase assets
74
QE 1 2009-2010:
Fed bought $1.75 trillion MBS and Treasury Securities
75
QE-2
Fed's statutory mandate
Foster maximum employment and price stability
76
QE-2 two actions
1. Fed will purchase a further $600 billion of longer-term Treasury Securities for the System Open Market Account (SOMA) by June 2011
2. The open market trading desk will continue to reinvest principle payments
77
Leading Economic Indicators Index =
=96
up 0.2% m/m, 2.3% y/y
78
What does the Leading Economic Indicators show?
Recovery is continuing but remains weak
Economy has not yet reached "escape velocity" to become self-sustaining expansion
Business inventories are rising fast and could represent excess stock. This could be a harbinger (foreshadow) of weaker economic growth over the next few months
79
Breadth/diffusion of index:
Leading Economic Indicators
4 or 10 components were positive, 2 unchanged, 4 negative
The breadth of the index is associated with economic durability
80
Leading Economic Indicators
Strengthening components
Rising credit index
Steeper yield curve
Lower jobless claims
81
Leading Economic Indicators
Negative components:
Falling building permits
ISM new orders
Stock prices
82
Credit Crunch factors
Subprime/jumbo mortgage default concerns
Balance sheet assymetiric information
Weakening economy
\*Fund flows dry up and shift supply left
83
Dysfunctional Credit Markets
Subprime mortgage
Jumbo mortgage
Interbank
84
Term Asset-backed Security Loan Facility
(TALF)
Restore credit flows to households and firms through the securitization market
85
TALF loans characteristics:
1. Non-recourse (Fed can only seize ABS)
2. Secured by eligible collateral (AAA)
3. 3-yr term
4. Interest rate = 1-mo LIBOR + 100 bps (1%)
\*LIBOR = London Interbank Offered Rate
5. Loan-to-value & haircuts (4-12%)
6. Interest payable monthly
7. Borrower has option to prepay loan
8. ABS capital remittance must be used to pay down TALF loan
86
LIBOR
London Interbank Offered Rate
Rate banks lend money on the international market
87
Recession =\>
increase defaults =\> decrease demand for ABS =\> mkt. dislocation =\> decrease credit availability & increase interest rates =\> economic slowdown
88
Revive the Shadow Banking System
2005-2006
$1 Trill/yr in funding
89
3 stages of production
Crude materials =\> Intermediate goods =\> Finished goods
90
Core inflation
excludes food and gas (too dependent on weather and war)
core finished goods have been extremely stable =\> labor costs (**70%**) are a huge part of the profit of finished goods (keep it stable)
91
core finished goods
proxy for near term consumer inflation = 2.3%
92
Core crude goods
leading indicator of global economic growth
93
Core goods: finished
Numbers
- 0.2% m/m
2. 1% y/y
(falling vehicle prices)
94
Core goods: intermediate
numbers
0 m/m
-0.5% y/y
95
Core goods: crude
- 1.4% m/m
- 5.9% y/y
Falling metal prices
96
Core goods factors
Falling energy prices
Rising food prices (mainly dairy) =\> summer drought
Foreign firms exporting to the U.S. have little pricing power
Falling value of dollar will increase import prices
Input price growth will remiain remain due to uncertainty over: U.S. fiscal policy and Global economic growth
97
Open Market Purchase
1. Fed buys T-Bill from Bank A
2. increase bank excess reserves
3. r = reserve requirement = 10%
98
Red fund rate and ___________ are very closely related
CDs
99
\_\_\_\_\_\_\_\_\_\_\_\_\_\_ determine deposit rates
market rates
100
Artificial stimulus
Monetary and fiscal stimulus
101
Depressions can be good:
free up resources from dying to thriving industries
102
Mal adjustment
Excess housing and debt of '05
103
CPI target
2.5%
104
CPI late 70s early 80s
high inflation
12% 13%
105
Money Market Liquidity Trap
Getting trapped in banks and not being lent out
Hoarding money (mattress, burying)
106
2008 money demand becomes completely \_\_\_\_\_\_\_\_\_
elastic (horizontal)
Fed increases MS, but interest rates are unchanged because no spending or fall in interest rate so no shift in demand
107
Exports fell \_\_\_\_\_\_\_\_\_\_\_\_\_
3.6% to $181.2 million
108
Exports above \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
2007-2008 average
109
Trade balance: recovery =\>
fast growing investment based trade
- capital goods
- Industrial supplies and materials
110
Trade balance: expansion =\>
rise in consumption-based trade
111
Imports decreased \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
2% to $227.2 billion
112
Imports below \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
2008 peak
113
Trade balance =
x - m
114
Trade deficit rose to
-42.2 billion
115
Trade deficit in goods
-59.1 billion
116
Trade surplus in services
16.9 billion
117
Reciprocal
one of a pair of numbers whose product is one
118
Between 2002-2007 dollar exchange rate felll \_\_\_\_\_
24%
119
Between august 07 - august 08 dollar exchange rate fell \_\_\_\_
12%
120
Why is dollar exchange rate falling?
1. Subprime credit mess =\> subprime currency
2. Fed lowering money market rates (int. rates)
3. weaker U.S. investment prospects
4. Trade deficit
5. U.S. budget deficit
6. Inflation concerns
121
As euro appreciates =\>
imports fall
exports rise
122
A change in real interest rates =\>
Change in E (exchange rate)
123
